Item 1. Business
ITEM 1.
BUSINESS
The Trust is an express trust created under the laws of the State of Texas by the San Juan Basin Royalty Trust Indenture entered into on
November 1, 1980, between Southland Royalty Company (Southland) and The Fort Worth National Bank. Effective as of September 30, 2002, the original indenture was amended and restated and, effective as of December 12, 2007,
the restated indenture was amended and restated, which we refer to as the Indenture. As a result of a series of mergers and other transactions, the current Trustee of the Trust is PNC Bank.
The Conveyance and the Royalty
Pursuant
to the Net Overriding Royalty Conveyance (the Conveyance) effective November 1, 1980, Southland conveyed to the Trust a 75% net overriding royalty interest (the Royalty) that burdens certain of Southlands oil and
natural gas interests (the Subject Interests) in properties located in the San Juan Basin of northwestern New Mexico (the San Juan Basin). Subsequent to the Conveyance of the Royalty, through a series of sales, assignments
and mergers, Hilcorp became Southlands successor. Hilcorp acquired the Subject Interests from Burlington Resources Oil & Gas Company LP (Burlington), an indirect wholly-owned subsidiary of ConocoPhillips on July 31,
2017. The Royalty functions generally as a net profits interest. Under the terms of the Conveyance, the Trust receives royalty income (Royalty Income) equal to 75% of Net Proceeds attributable to the Subject Interests. The term Net
Proceeds, as used in the Conveyance, means the excess of Gross Proceeds received by Hilcorp during a particular period over production costs for such period. Gross Proceeds means the amount received by Hilcorp (or any subsequent
owner of the Subject Interests) from the sale of the production attributable to the Subject Interests, subject to certain adjustments (e.g., fuel, gathering, and transportation). Production costs generally means costs incurred on an
accrual basis by Hilcorp in operating the Subject Interests, including both capital and non-capital costs. For example, these costs include development drilling, production and processing costs, applicable
taxes and operating charges. However, Hilcorp informed the Trust that, for wells operated by Hilcorp, it generally did not intend to accrue lease operating expenses to the Trust. If production costs exceed Gross Proceeds in any month, the excess is
recovered out of future Gross Proceeds prior to the making of further payment to the Trust. The Trust is not otherwise liable for any production costs or other costs or liabilities attributable to the Subject Interests or the minerals produced
therefrom. If at any time the Trust receives more than the amount due under the Royalty, it is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate
specified in the Conveyance.
The Royalty constitutes the principal asset of the Trust. The Trusts beneficial interest in the
Royalty is divided into 46,608,796 units (the Units) representing undivided fractional interests in the beneficial interest of the Trust equal to the number of shares of the common stock of Southland outstanding as of the close of
business on November 3, 1980. Each stockholder of Southland of record at the close of business on November 3, 1980 received one freely tradable Unit for each share of the common stock of Southland then held. Holders of Units are referred
to herein as Unit Holders.
As of December 31, 2021, 98% of the Trusts estimated proved reserves consisted of
natural gas reserves, and 94% of the Gross Proceeds from the Subject Interests in 2021 were attributable to the production and sale of natural gas by Hilcorp as well as other proceeds. Accordingly, the market price for natural gas produced and sold
from the San Juan Basin heavily influences the amount of Trust income available for distribution to the Unit Holders by the Trust and, by extension, the price of the Units. However, due to a variety of reasons, the market price index for natural gas
produced from the San Juan basin does not completely align with the market price paid to Hilcorp. In addition, the market price paid for natural gas is seasonal because there is greater demand for natural gas used for heating purposes in the winter
months and more energy requirements for air conditioning in the summer months than during the rest of the year.
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The Trustee
The primary function of the Trustee is to collect the Royalty Income, to pay all expenses and charges of the Trust and to distribute the
remaining available income to the Unit Holders. The Trust received approximately $37.6 million and $8.8 million in Royalty Income from Hilcorp in each of the fiscal years ended December 31, 2021 and 2020, respectively. After deducting
administrative expenses and accounting for interest income and any change in cash reserves, the Trust distributed approximately $36 million and $7.4 million to Unit Holders in each of the fiscal years ended December 31, 2021 and 2020,
respectively. The Trusts corpus was approximately $3.7 million and $5.1 million as of December 31, 2021 and 2020, respectively.
Proceeds from production in the first month are generally received by Hilcorp in the second month, the Royalty Income is paid by Hilcorp to
the Trustee in the third month, and distribution by the Trustee to the Unit Holders is made in the fourth month. Unit Holders of record as of the last business day of each month (the monthly record date) will be entitled to receive the
calculated monthly distribution amount for such month on or before ten business days after the monthly record date. The amount of each monthly distribution will generally be determined and announced ten days before the monthly record date. The
aggregate monthly distribution amount is the excess of (i) the Royalty Income paid to the Trustee, plus any decrease in cash reserves previously established for liabilities and contingencies of the Trust, over (ii) the expenses and
payments of liabilities of the Trust, plus any net increase in cash reserves.
The Trustee may, in its sole discretion, establish a cash
reserve for payment of Trust liabilities that are contingent or uncertain or otherwise not currently due and payable. As of December 31, 2021, the Trustee had established cash reserves of $1.0 million. In August 2021, the Trust utilized
cash reserves of $150,148 to pay Trust administrative expenses. The Trustee replenished the cash reserves by $150,148 in September 2021 to bring the cash reserve balance to the previously established amount of $1.0 million. The Trustee
does not anticipate any increase or decrease to the cash reserves in 2022.
Cash being held by the Trustee as cash reserves or pending
distribution may be placed, in the Trustees discretion, in obligations issued by (or unconditionally guaranteed by) the United States or any agency thereof, repurchase agreements secured by obligations issued by the United States or any agency
thereof, certificates of deposit of banks having capital, surplus and undivided profits in excess of $50 million or money market funds that have been rated at least AAm by Standard & Poors and at least Aa by Moodys,
subject, in each case, to certain other qualifying conditions. Currently, such funds are placed in interest-bearing money market accounts.
The other powers and duties of the Trustee are set forth in the Indenture and include the prosecution and defense of claims by and against the
Trust, the engagement of consultants and professionals and the payment of Trust liabilities. If the Trustee determines that the Trust does not have sufficient funds to pay its liabilities, the Trustee may borrow funds on behalf of the Trust, in
which case no distributions will be made to Unit Holders until such borrowings are repaid in full. The Trustee may not sell or dispose of any part of the assets of the Trust without the affirmative vote from the Unit Holders of 75% of all of the
Units outstanding; however, the Trustee may sell up to 1% of the value of the Royalty (as determined pursuant to the Indenture) during any 12-month period without the consent of the Unit Holders if it
determines such a sale is in the best interest of the Unit Holders. The Trust does not operate the Subject Interests and is not empowered to carry on any business activity. The Trust has no employees, officers or directors. All administrative
functions of the Trust are performed by the Trustee.
Under the Indenture, the Trustee may act in its discretion in carrying out its
powers and performing its duties and is liable only for fraud or for acts and omissions in bad faith. The Trustee is not liable for any act or omission of its agents or employees unless the Trustee acted in bad faith in its selection and retention
of such agents or employees. The Indenture provides that the Trustee and its officers, agents and employees must be indemnified and receive reimbursement of expenses from the assets of the Trust for liabilities and claims incurred in the
administration of the Trust, except for liabilities and claims arising from the Trustees fraud or bad faith.
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The Trust has no employees, directors, or executive officers, and thus does not have a
business need to focus on its human capital resources.
Duration of the Trust
The Trust will terminate if (a) its gross revenue for each of two successive years is less than $1 million per year or, if earlier,
(b) the Unit Holders of at least 75% of all of the Units outstanding vote in favor of termination. Upon termination of the Trust, the Trustee must sell the Royalty and distribute the proceeds to Unit Holders after satisfying or establishing
reserves to satisfy the liabilities of the Trust.
Hilcorp
The sale of San Juan Basin assets from Burlington to Hilcorp closed on July 31, 2017. Hilcorp is the operator of the majority of the
Subject Interests, and as a result, Hilcorps actions could have a material impact on the results of operations and Hilcorp could have interests that conflict with the interests of the Trust and the Unit Holders. The Subject Interests that are
not operated by Hilcorp are operated by other operators, some of which may be affiliated with Hilcorp. As an operator, Hilcorp has the obligation under the Conveyance to conduct its operations in accordance with reasonable and prudent business
judgment and good oil and natural gas field practices. The development of the Subject Interests is conducted pursuant to operating and similar agreements to which the Trust is not a party and under which the Trust has no control or other rights to
determine the location, timing and other key aspects of development and maintenance that may materially impact results of operations. Neither the Trustee nor the Unit Holders can influence or control the operation or future development of the
Subject Interests.
Hilcorps interests may conflict with those of the Trust and the Unit Holders in situations involving the
development, maintenance, operation or abandonment of the Subject Interests. Hilcorp has the right to abandon any well when, in its opinion, such well ceases to produce or is not capable of producing oil and natural gas in paying quantities, even
though such well is still generating revenue for the Unit Holders. Hilcorp reserves the right to not participate in operations on the Subject Interests when it has a right to do so under the applicable operating or similar agreement. Hilcorp may
make decisions with respect to expenditures and decisions to allocate resources to projects in other areas that adversely affect the Subject Interests, including reducing expenditures on these properties, which could cause oil and natural gas
production to decline at a faster rate and thereby result in lower cash distributions by the Trust in the future. In addition, Hilcorp is not obligated to the Trust to maintain any particular types or amounts of insurance, and insurance may not be
commercially available at adequate levels to cover its operational hazards at all times during the life of the Trust. If a well is damaged, Hilcorp would have no obligation to drill a replacement well or otherwise compensate the Trust for the loss.
The Trust does not have insurance or indemnification to protect against losses or delays in receiving proceeds from such events.
Hilcorp
also is responsible, subject to the terms of an agreement with the Trust, for marketing the production from such properties, either under existing sales contracts or under future arrangements, at the best prices and on the best terms it shall deem
reasonably obtainable in the circumstances. Additionally, Hilcorp is obligated under the Conveyance to maintain books and records sufficient to determine the amounts payable to the Trustee.
Additional Information
The principal
office of the Trust is located at 2200 Post Oak Blvd., Floor 18, Houston, Texas 77056 (toll-free telephone number (866) 809-4553). The Trust makes available (free of charge) its annual, quarterly and current
reports (and any amendments thereto) filed with the SEC through its website at www.sjbrt.com as soon as reasonably practicable after electronically filing or furnishing such material with or to the SEC. The Trusts materials filed with
the SEC are available at the SECs internet site, www.sec.gov . This site contains reports and,
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as applicable, proxy and information statements, and other information regarding the Trust and other issuers that file electronically with the SEC.
The Trust is a widely held fixed investment trust (WHFIT) classified as a non-mortgage
widely held fixed investment trust (NMWHFIT) for federal income tax purposes. The Trustee, 2200 Post Oak Blvd., Floor 18, Houston, Texas 77056 (toll-free telephone number (866) 809-4553, email
address: sjt@pnc.com ), is the representative of the Trust that will provide tax information in accordance with the applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT and a NMWHFIT.
The tax information is generally posted by the Trustee on the Trusts website: www.sjbrt.com .
ITEM 1A.
RISK FACTORS
Not required.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.